Estimating Portfolio and Consumption Choice: A Conditional Euler Equations Approach


  • Michael W. Brandt

    1. The Wharton School, University of Pennsylvania
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    • The Wharton School, University of Pennsylvania. I thank Yacine Aït-Sahalia, George Constantinides, Lars Peter Hansen, Campell Harvey, and especially John Cochrane for their guidance and encouragement. I also thank Robert Hodrick, René Stulz (the editor), two anonymous referees, and seminar participants at the 1998 Western Finance Association conference, Columbia University, Duke University, MIT, Northwestern University, Ohio State University, Stanford University, the University of California at Berkeley and Los Angeles, the University of Chicago, the University of Pennsylvania, the University of Southern California, and Yale University for many helpful comments. I am responsible for any remaining errors.


This paper develops a nonparametric approach to examine how portfolio and consumption choice depends on variables that forecast time-varying investment opportunities. I estimate single-period and multiperiod portfolio and consumption rules of an investor with constant relative risk aversion and a one-month to 20-year horizon. The investor allocates wealth to the NYSE index and a 30-day Treasury bill. I find that the portfolio choice varies significantly with the dividend yield, default premium, term premium, and lagged excess return. Furthermore, the optimal decisions depend on the investor's horizon and rebalancing frequency.